Corporate Diplomacy: IKEA and the Russian Market
A Communication Strategy of Multinationals in Relation to Host Governments
Corruption in the Russian Market
One of the main issues IKEA faced when it attempted to get into the Russian market was corruption (Heath, 2010). Because of the level at which that corruption took place, IKEA publicly rallied against it in an effort to change some of the problems that appeared to be so inherent in Russia’s political system (Meyer, 2011). The corruption was something likely seen in other markets, as well, but not as blatantly as it was seen in Russia. IKEA’s slogan in Russia was “Now Everything is Possible!” (Heath, 2010). That made sense in many ways. It sounded good in Russian, it spoke to the economic and political resurgence the country was experiencing, and it also related to the large number of items that can be found for sale in the IKEA stores (Heath, 2010). However, there was more to the slogan, which was used for IKEA’s new catalog that year. Part of it was letting people know that IKEA was serious about being a part of their country, and that they wanted to make their country a better place to shop, and to live. The company even went so far as to fire two executives, who had been giving bribes to a utility company (Heath, 2010).
That sent a clear statement to the Russian people and the Russian government, that IKEA did not tolerate bribes as part of the way work would be done at the company, no matter what country it was located in (Meyer, 2011). Most of IKEA’s bribery problems were centered in St. Petersburg, where the company was building a case against the corruption that it was finding in the Russian government and in the utility companies (Meyer, 2011). Unfortunately, two of the representatives who were on the committee to address these issues were found to have been taking bribes, and IKEA had to let them go (Heath, 2010). It is not possible to rail against bribery if people in the company are taking bribes. That was unacceptable behavior to IKEA, and did not help their case.
The swiftness of the action taken against the bribes was very important for IKEA when building a case that bribes were not acceptable and attempting to show that they were not going to take or give bribes for any reason. Without their willingness to do that, they may not have had a case when stating that bribery was not acceptable and that they would not play that particular game with the Russian government or any of its companies (Health, 2010). It is always possible for there to be a bad person at a company. That really cannot be helped. What the company does about that person, though, can make a strong statement about how the company really feels and the things that matter to the company, overall. With corruption running so rampant in the Russian market, IKEA soon found itself struggling to keep the values it held and still get anything done. It was not willing to give up on the idea of success in the Russian market, though, and was ready for a hard-fought battle (Heath, 2010).
Bribery From the Utility Company
The issue with bribery could not have come at a worse time, either, because the bribes between the company officials and the utility company Lenenergo took place right around the time the company launched a campaign saying it could not go forward with its planned expansion into Russia, because it does not accept or allow bribery (Heath, 2010). That all occurred in 2009, when the company was first working toward having a presence in Russia and getting everything worked out with the government, contractors, and utility companies there (Heath, 2010). Just as IKEA was about to open their store, the utility company approached them and said they would have to have a bribe before they would turn the power on (Bush, 2009). IKEA refused, and rented generators that ran on diesel and would power their store. It was not long until the power was turned on, without the bribe (Kramer, 2009). However, doing that was just the start of the problems faced by IKEA, which then tried to build a case against the corruption but quickly found that the courts did not want to side with the company and against Russian utility companies (Bush, 2009).
There were other behaviors engaged in that IKEA also had difficulty with, and one of the big questions was when the company learned about the behaviors vs. when they mentioned that they had become aware of them (Heath, 2010). This was a discussion that was addressed in the media, and also no doubt addressed within the company itself. However, there was little conclusive evidence to be had, and it was possible that IKEA really did not know what was taking place before it was brought to their attention and they were threatened with unpleasant publicity (Heath, 2010). Concerns were that IKEA had actually known about the bribery and was not going to do anything about it, until it became clear that the information would be made public and the company would have to say something regarding the issue (Heath, 2010). That would be an understandable concern, especially in a country where bribes are really accepted as normal behavior.
This has never been conclusively proven, however, and whether IKEA new much earlier is not known. Companies that publicly come out against bribery can have a difficult time when they are found to have accepted bribes. This is something about which IKEA had to do damage control quickly, in order to make sure it was showing that it would not tolerate this kind of behavior (Heath, 2010). The executives who were allowing the bribes were both fired, so they quickly paid a price for their role in the issue. However, that does not necessarily absolve IKEA of its guilt, and there were opinions on both sides of the issue as to whether IKEA knew about the issue and covered it up, or whether the company would have said something even if they had not been threatened with publication of that information (Heath, 2010). Either way, the bribery scandal put a black mark on IKEA’s strong record of going up against those who would carry out bribes and other corrupt activities.
The Russian Side of the Issue
To fully understand the issue, one also has to look at the Russian side of things. There are a number of large, foreign investors in the country, and IKEA is one of the biggest (Heath, 2010). As of 2008, IKEA had already invested nearly $3 billion in Russia (Heath, 2010). While there is corruption in the retail sector, there is not as much seen there as in energy, healthcare, natural resources, and other areas. The hydrocarbons sector contains most of the large investors from foreign countries, as well, but IKEA is not far behind, and as such, Russia wants to keep IKEA investing in its country (Heath, 2010). Because Sweden, which is IKEA’s home country, is very non-corrupt, and because the retail sector is one of the least corrupt sectors in the Russian market, one has to carefully consider the overall corruption issues that are seen in Russia and how strong they must be to spill over to a sector and a company that would largely find those types of issues unacceptable (Heath, 2010). Companies face extremely severe challenges in Russia when it comes to operating without any corruption, no matter what kind of company or which sector they fall into.
President Medvedev has, essentially, ordered a war on corruption throughout Russia, because he knows it exists and he sees the damage it is doing to the country and to the investors who want to come in but either cannot or decide against it. Since his inauguration, he has passed laws that have stopped some of the corruption and lowered the number of bribes that have been given (Heath, 2010). While this is a good start, it is not enough to wipe out corruption in the country, even though enforcement of the laws that were created and the ones that already existed has been better, as well. Unfortunately, there have been upsetting consequences that have come from this new enforcement. Most of the cases that have been prosecuted have been against those who have offered bribes, not those who have taken them (Heath, 2010). Additionally, the cases have been for small amounts, generally $300 or less (Heath, 2010). That does nothing for the large bribes that occur.
Breakdown in Russian Laws and Regulations
It also does nothing to stop the people who are taking the bribes, because they generally are not prosecuted. Since that is the case, the poor and powerless in Russian society (i.e. those who offer the small bribes in an effort to get things done) are the ones who are really paying the price of the newly created and newly enforced laws (Heath, 2010). Taking the approach that Medvedev has started recently will not make Russia a better place to live and work, and will certainly not help it from a business standpoint. Instead, more and more companies will shy away from doing business there, until and unless Russia focuses on the true problems with corruption and actually does something to get them stopped (Heath, 2010). IKEA is only one of the companies that has struggled with corruption issues when attempting to move into the Russian market. While the company has not given up plans for expansion, there are concerns that it may have to abandon plans for specific cities because of the corrupt patterns being seen throughout the country (Heath, 2010).
Russia is still an emerging-market economy, and it needs a high level of foreign investors to keep it moving forward and allow it to expand and grow (Meyer, 2011). As such, it needs investors like IKEA to continue to come to the country, and to continue to expand in the country. Only setting up shop in one city is not going to do much for the store, and is also not going to do much for the overall Russian economy. However, IKEA is now backing off on many of its expansion plans, and other retailers and large investors are saying no to Russia, because of the level of corruption that IKEA experienced (and went public with) while trying to build a stronger presence in the country (Meyer, 2011). In 2009, IKEA placed a freeze on building any more stores in Russia, because the country was having (and still has) a serious problem with corruption that was not being addressed and curtailed even after IKEA made it a very public issue that should be dealt with (Meyer, 2011).
Withholding of Building Permits
IKEA wanted to build in Ufa and Samara, which are central Russian cities. However, Russia originally withheld permission for the two outlets to be constructed, completed, and opened (Meyer, 2011). The safety inspectors wanted bribes, and IKEA refused to pay them. Even though there have been some bribe issues with IKEA in the past, the company fired the people who were involved in it and moved on, reiterating its stance that bribes were not an acceptable way to do business. Because IKEA will not pay bribes to the safety inspectors, Russia will not allow IKEA to open stores in Ufa and Samara (Meyer, 2011). The lack of interest in avoiding bribery and corruption has been a problem in Russia for a very long time, and it does not look as though there will be changes made anytime soon. That is unfortunate for the country, and also unfortunate for IKEA and other retailers that want to move into the market (Meyer, 2011). Most of the foreign companies now doing business in Russia are energy companies, and a better mix of foreign investors is needed.
The Turnaround and an Expansion
Just when it looked as if the stores in Ufa and Samara would never get built, and when IKEA was nearly ready to give up hope, though, things began to change (Heath, 2011). In six months time, IKEA went from a freeze on anything more in the country to nearly opening its two Ufa stores and getting plans for its Samara store approved (Heath, 2011). Plans to go forward in the Moscow region have been renewed and are back on track. While all of that is good news for IKEA and for Russia, it does beg the question of what changed to make everything work out when it seemed there would be no way to do so. The Ministry of Economic Development reportedly reached out to IKEA and worked with them to the satisfaction of everyone involved, so that their economic development in Russia could continue (Heath, 2011). The corruption investigation into the St. Petersburg store seems to have disappeared as well, but that could be a temporary issue and problems could come to light again at a later date, depending on decisions made in Europe regarding prosecution issues (Heath, 2011).
While there are still concerns, IKEA’s Russian expansion is moving forward once again. Whether there will be future problems with corruption or with the fallout from the St. Petersburg issues will remain to be seen, but these are not concerns that are slowing down IKEA any longer (Heath, 2011). Instead, the company is fully focused on success. However, that success could be threatened in the future if European sanctions are brought against the company for the St. Petersburg issue. Russia has made it clear that there is not going to be any investigation or prosecution on its side, but that does not clear up what may happen in Europe at a later date. Unlike the U.S., that is usually quick to move on those types of issues, Europe generally takes longer to make a determination of potential wrongdoing. IKEA could be found to have potentially committed a crime at a later date, which will require it to defend itself and its actions in St. Petersburg.
While it is important to analyze what took place in Russia when it comes to IKEA, an analysis does not provide that much information without a discussion of why the issue occurred and how it was handled. The why is relatively easy: corruption. It is not a secret that corruption has been running rampant in the Russian government and throughout most of its industries for a number of years. Some eras have seen less corruption and others have seen more, but it is never something that has gone away completely. In the case of IKEA, it was a matter of standing their ground and making sure the country understood the value the company could bring to it — and how IKEA was not going to play Russia’s bribe game in order to get things done. Even though it seemed as though Russia was really not taking IKEA seriously, the country did eventually realize that IKEA was not going to change its ways.
Additionally, Russia realized that the revenue IKEA was generating was more valuable than whether it was providing bribes to the country and its officials. There are still problems, but they are far fewer than they were in the past — and IKEA is finding that the current issues are not insurmountable. In order to address those issues, and in order to take a more careful look at the corruption and bribery that took place in the past and why it was handled in particular ways, one has to consider the business climate in Russia, as well as diplomacy and management from the standpoint of IKEA. Like any company, IKEA wants to succeed. Despite that, there are some things that IKEA simply will not do, even if it means becoming more successful. Because that is the case, IKEA has to not only understand the climate in which it is going to do business, but must also be aware that it must adapt to that climate to a certain extent. However, that does not mean that IKEA should comprise itself or its values.
Russia’s Business Climate
The business climate in Russia is far different than in other areas of the world. This has been seen for many years, and it does not look as though anything about it will be changing anytime soon. Part of the reason for the lack of change is that Russia has never been a country that is big on making changes, and part of the reason is that the country does not seem to have a desire to become “Western” in the way many other countries have (Wood, 2011). That is not necessarily right or wrong, but it is affecting the companies that will do business with Russia. In many cases, companies that will work with a number of other countries choose to stay out of Russia, because they hear stories of corruption and other problems. They may investigate for themselves, of course, because a great deal of money could be riding on the decision they make (Wood, 2011). No matter what type of investigation they do, an honest study of Russia and its business diplomacy will show that there is actually very little diplomacy available for companies that are not completely Russian (Wood, 2011).
Most of the companies that operate within Russia are companies that are based there. Because of that, they follow the government’s laws and regulations, and they also follow the unspoken and unwritten “laws” that come with bribery and related ways of getting things done (Wood, 2011). If companies want their permits to be provided, their plans to be approved, and their power to be turned on, bribery is generally a way of life. Things might get done without the bribes, but they are not going to get done as quickly or as easily, and that is a serious issue for companies that need to get up and running so they can make money (Wood, 2011). That is not to say that every bit of Russia is corrupt, or that nothing gets done without bribing someone else to do it. There are honest companies and honest officials. However, Russia is one of the most corrupt countries in the world, and it has held that distinction for some time now. This is not a new occurrence, and it is one that is very difficult to stop.
The business climate in Russia is also a bit cold to other companies that want to come in but that are based in other countries. While Russia does seem to understand that it needs to let companies in so revenue can be generated and its economy can continue to grow, it appears to have trouble actually making that happen (Wood, 2011). It is not consumer friendly, and it is not business friendly, so many companies choose to stay away. Instead, they build and expand in other countries, where the business climate is much friendlier and they do not have to worry so much about how they are going to get their stores built or their power turned on (Wood, 2011). The Russian people are generally not the problem. They welcome new businesses for the most part, because it gives them options to consider and allows them access to a number of things that they have not been able to purchase in the past. That is part of the reason for the popularity of IKEA, because it has so many different items that were not able to be purchased in Russia before stores were built there.
IKEA is not the only store that has struggled with Russia’s lack of diplomacy. Companies like Walmart have pulled out of the Russian market and moved to countries where they are more easily welcomed and where they are free to operate without corruption at nearly every level (Wood, 2011). Because these kinds of issues take place, Russia is losing market share that the country would likely have preferred to have kept. Until Russia makes changes, though, that will continue to be the case (Wood, 2011). There are ways in which Russia can improve its business diplomacy, but those ways start at the top and involve some difficult changes that would have to be undertaken. The first of those changes would be to actually pass (and enforce) laws that stop the corruption that is currently taking place.
While the Russian President did pass new laws and start enforcing the older ones, he did so in a way that actually seemed to do more harm than good. All of the large bribes that change hands between huge companies are still being ignored, while the smaller bribes are being discovered and prosecuted (Wood, 2011). One could argue that some is better than none, but the problem with doing things this way is that it is only a drop in the metaphorical bucket when it comes to stopping bribery and punishing those who are involved in it. The small time people who are being punished the most are not the ones who are really causing the high levels of harm, and Russia should be focusing its business diplomacy on stopping the large amounts of corruption that take place in big business (Wood, 2001). Since that is not happening, corruption and bribery are still seen as the status quo for Russian businesses, and for businesses from other countries that want to access the Russian market.
The second problem with the way the Russians are handling their business diplomacy and the corruption issue is that the people who give the bribes are the ones being arrested and prosecuted, while the ones who take the bribes generally go free (Wood, 2011). It is not possible to build good business diplomacy with other countries if the only people being punished are those who offer bribes just to get through the system. If the system did not allow for asking for bribes, there would not be companies offering them (Wood, 2011). In short, it would be much better to punish the people who are getting the bribes, because they are the ones asking for and accepting them, as opposed to the people who are giving the bribes. These people may not feel as though they have a choice, if they want to have their permits issued or their power turned on. It is not their fault that they must work within a broken system, but the officials who grant things like power and permits can certainly stop asking for and accepting bribes. Not prosecuting them sends a strong message.
Unfortunately, that message is not a business-friendly one, and it does not appear that much will be changing anytime soon. There was a great deal of hope with the President of Russia started making new laws about corruption, and when the laws already on the books started to be enforced (Wood, 2011). That got companies thinking about the Russian market again, and that maybe Russia was going to be a viable option for their business expansion. It was not long before those same companies realized that enforcement was sporadic, at best, and that the target of the enforcement was the people who were giving the bribes, not those who were asking for and accepting them. With that in mind, and the understanding that the majority of cases were against people who were bribing for less than $300, companies pulled away from considering Russia for their expansion, citing the belief that nothing had really changed in the country, after all (Wood, 2011).
If Russia really wants to have more companies coming in, the country will have to make true and lasting changes. Those changes will need to be focused on actual diplomacy and fair treatment of all businesses, which does not include any kind of bribes being acceptable, no matter how much they are for or who is asking for them. There is much more to diplomacy than just stopping bribes, though, and Russia has a lot of work to do if it is going to attract new businesses into its market. For example, Russia still largely favors companies that are based there, and does not generally welcome companies that come from other countries — especially the West (Wood, 2011). Because of that, the majority of companies that do business in Russia are energy producing companies that handle things like electric, oil, and gas. While there is nothing wrong with having those companies as the backbone of the economy, there are not enough other types of companies to actually help Russia move forward and be successful in improving its economic position (Wood, 2011).
Because the energy sector is so strong in Russia, companies that are involved in it are doing very well. However, the rest of the sectors of the economy do not show much, if any, growth and development. Because there is only a need for a certain amount of energy, the economy cannot grow much more when other types of companies are not allowed to be a bigger part of that economy (Wood, 2011). Rather than focus on the energy sector, which is already fully developed, Russia must open its business diplomacy and communication to companies that are not related to energy. The retail sector is an excellent choice, as there will always be consumers who want to buy goods and services that they not currently be able to find (Wood, 2011). Allowing expansion in that sector could stimulate Russia’s economy quite strongly, but the corruption issues would have to be handled properly, and companies would truly have to be welcomed (Wood, 2011). It seems that Russia may not want to be “Westernized” that much, which could be holding the country back economically.
With such a large population, Russia is a logical choice for expansion of retail companies like IKEA. These companies are able to sell a high level of goods and services for a low price. They can do that because they buy in volume, so they pay less per item than a more specialized shop would. Many of the items and brands they carry are things that have not been seen before in Russia, so the people there are very interested in buying and trying them. That helps the company expand, and also provides the Russian people with more choices than they had in the past. The people are currently being held down in their choices because of their government’s lack of diplomacy, which is likely frustrating to many of them. Unless there is real change at the government level, though, it is unlikely that the country will bring in many more retail businesses.
The idea behind corporate diplomacy is an important one. If Russia needs to work on its business diplomacy in order to attract more companies, than the companies and corporations that want to do business with Russia should also practice diplomacy. When companies are diplomatic, they can accomplish much more and often create better deals that are highly beneficial to both parties (Henisz, 2014). This is what companies like IKEA should be interested in and focused on. These corporations certainly do not want to have to deal with bribes, but they also do not want to react so strongly that they alienate the country. Saying no, diplomatically, has a lot of power in the corporate world (Christensen & Cornelissen, 2011). It is often not so much about the message that is being given, but about the way the message is presented and conveyed from one person (or company) to another. Conveying a message properly (i.e. diplomatically) can go a very long way toward making sure both parties to the discussion understand and are willing to work out an agreement (Henisz, 2014).
Corporate diplomacy is not always easy, however, because many people struggle to be diplomatic. Tensions can rise during negotiations and discussions, and that can cause the negotiations to turn into more of a fight than a discussion. Even a heated debate can leave people feeling as though they no longer want to do business with one another, when before they felt as though they would have worked well together (Abrahamson & Eisenman, 1999). It is no secret that the policies and procedures required to get a company up and running in the Russian market can be frustrating, but a high level of diplomacy can go a very long way toward helping companies get into that market and have a level of success that they might not have otherwise seen (Tse, 2010). In short, being diplomatic is one of the best ways to make money in any market, including Russia.
Corporate diplomacy is more than just saying yes or being polite. There are a number of ways to be diplomatic, including cultural issues, manner of speaking, the way a person is dressed, facial expressions and posture, and what a person is willing to give up or concede to in order to get the deal done. With so much to consider, it can be easy to overlook something. Fortunately, it can also be easy to make it up in other areas, and some mistakes are bound to happen. Working with Russia, though, can require stronger levels of corporate diplomacy than what would commonly be seen, because the government and officials there are very different from what is seen in Western countries and throughout much of Europe and Asia (Khattab, Anchor, & Davies, 2007). With the differences in the way business is handled being so strong, any company interested in moving into the Russian market will need to focus on keeping things as diplomatic as possible. While corporate diplomacy is not always easy, it is very important to the success of a developing business.
Being diplomatic with people one is used to is far different than working with a different country on something as important as a large corporate venture (Jablin & Putnam, 2001). IKEA was focused on corporate diplomacy in that it was willing to do what was necessary within the confines of the law to make sure it was able to get into the Russian market, and expand its number of stores once it got up and running. However, there were certain things that IKEA was not willing to do, like offer bribes, even though that would have been the diplomatic thing to do, in a sense. It was certainly expected of the company because it was something that nearly all companies in Russia did on a frequent basis. It was how things got done there, and still is how things get done, but IKEA drew the line at that level of diplomacy. What Russia considered diplomatic, IKEA considered illegal and immoral, so it determined that it would not participate in that activity.
It can be very difficult for a corporation to remain diplomatic during these types of issues. It is likely that IKEA knew about Russia’s culture of corruption before it considered setting up stores there, but it may not have understood how deep that culture actually went. Additionally, many companies are not completely aware of what goes on in the business world of another country until those companies attempt to move into that country and find that they are hitting road blocks because they do not do things the same way the country does (Salacuse, 1999). That is not the case with all companies and all countries, but it is a relatively common issue that has to be faced by most corporations that decide they want to work with other countries (Stephens, Malone, & Bailey, 2005). Each corporation that does business in multiple countries, or that is thinking of moving into the market in a new country, must carefully consider corporate diplomacy in an effort to avoid problems that can slow down the plans for expansion and may even put an end to the entire project.
Large corporations often think that diplomacy is not really necessary, and that they can just muscle their way into a new place because they have an established name and reputation, but that is not always the case (Cornelissen & Kafouras, 2008). In a new country, a name and reputation from another country may not go very far, so the company will be starting at the bottom and have to work its way up. In those kinds of cases, corporate diplomacy is very important, because the company will want to move forward as quickly as possible to get a store built and open in a new area. That can start the revenue stream coming in, which will help to pay for the cost of creating the new store (Botan & Hazleton, 2006). Without that revenue the company may fail in the market, and having strong corporate diplomacy can help the company be more popular with the government of the host country.
One of the most significant issues that companies like IKEA can run into when moving into the Russian market is culture. Swedish culture and Russian culture are very different from one another in a number of ways, and that has to be carefully considered when negotiating between countries. For example, Sweden is one of the least corrupt countries in the world, whereas Russia is one of the most corrupt. That can make things difficult, as companies in Sweden would generally never take bribes, while companies in Russia would be expecting to receive them. This is a large cultural difference that may not be very easy to address, but that has to be worked through if there is to be success when it comes to a company moving into a different country and doing well there (Frandsen & Johansen, 2012). IKEA made it clear early on in the negotiations that they do not accept or offer bribes. They were clear about this, because it was important to them and because they have a particular set of morals by which they operate their business.
Despite this declaration, though, Russia still attempted to force IKEA into paying a bribe to have the power turned on at their first store. IKEA’s answer to that was to get diesel generators and use them to run the store. That was their negotiation tactic, which effectively said that they recognized that the Russian culture was different, but that they were not going to do something that went against their morals just to fit in (Cornelissen, 2011). It did not take long before the power was turned on, because Russia realized that IKEA was not going to back down on that particular issue. When negotiating across cultures, it is important to understand what can be pushed for and what simply cannot be changed. All cultures have things about which they feel very strongly, and if something is part of a person’s culture, he or she may be very reluctant to change it (Grunig, 1992).
That is certainly an understandable issue, but there also has to be some give and take when it comes to cultural negotiation. There are two parts to that kind of negotiation. One involves the actual business dealings, and the other involves the way the cultures treat one another and the respect they offer to one another, which can be very important in any business deal (Botan & Hazleton, 2006). Companies that feel their culture is being disrespected by others may have a difficult time working with those others to find a good balance or a common ground. Differences are not the issue so much as the way those differences are acknowledged and the way the people who have the differences are treated (Heath, 1997). If those who have differences of both culture and opinion treat one another with respect, much can be accomplished. Being respectful is vital, but it must not be allowed to lead to one person or the other becoming a “doormat” and allowing the other person to walk all over them. It is mutual respect that matters when it comes to intercultural negotiations (Guba & Lincoln, 1994).
One of the ways that mutual respect can be shown is through learning about the other culture, so that it is less unique or shocking, and so there is a better understanding of some of the things that might be said and done during negotiations (Greenwood, et al., 2008). That is not a guarantee that the negotiations will go smoothly, but could be a good way to help keep the negotiations moving forward when they look as though they might stall out due to a misunderstanding. Most of the cultural problems that come up during negotiations occur because of simple misunderstandings. Gestures and facial expressions can be very different across cultures, and that can lead people to think something completely different than what the other party actually meant to convey (Heath & Douglas, 1991). When that happens, tensions and start and people can become defensive, even though there was nothing that either party should have really gotten upset about.
Not only is that frustrating, but it can signal the end of negotiations, even if the two parties would have otherwise been likely to agree (Leonard, Stead, & Smewing, 2002). With IKEA and the Russian market, there was a serious clash of cultures. However, IKEA had done its research, and knew going in that it would be difficult to work with the Russian government. Despite that, IKEA also felt that it would be worth the effort, so it persisted and eventually was able to build stores and start expanding in the country. It is also likely that IKEA knew doing in how far it would go in order to keep the cultural boundaries as thin as possible, and what lines (such as offering bribes) it would not cross in order to have success. Every company that focuses on moving into a new country must be aware that there will be difference, and must also be clear on what differences it will accept or go along with, and which ones it will not (Frandsen & Johansen, 2012). Every company, just like every person, had a point at which they draw the line and will go no further, even if that stops the negotiations.
By knowing in advance where that line is, and determining if there is any “wiggle room” to move the line or make adjustments, a corporation can be sure about what it is doing when it moves into a new country and can still keep to the core beliefs it holds (L’Etang & Pieczka, 2006). That is good news for any corporation, because companies want to succeed — but only if they are able to work with and get along with the culture into which they are going to immerse themselves. Otherwise, there would be little benefit to moving into a new country. They would not be accepted by the culture into which they were moving, and the people would likely reject their products and services. Naturally, that is something they want and need to avoid if they are going to be successful in that country and if they are going to spend the money to build and stock new stores.
Among the many ways companies like IKEA can be successful in markets like Russia is through strategic management. Having a strategy is important, but so is knowing when to adjust that strategy and try something new because things are not working quite the way they were planned or expected to (Moss, 2002). Companies that are focused on strategic management know that they have to consider everything they do, and they have to look at their plans in the context of their customer base and the rules and regulations of the country in which they are operating (Moss, 2002). That makes countries like Russia more difficult to operate in, because they have rules and regulations that are very different from the majority of other countries. However, that does not mean that strategic management is the wrong choice. It only means that it will be important to focus on a strategic management plan that works for the country in which the store is located, even if that is not the right plan for other stores that are built and operating in other locations (Botan & Hazleton, 2006).
Companies have to be careful of their management plans and strategies, as well, because the market can be volatile and can change very quickly, necessitating adjustment to the plan. IKEA saw this with the Russian market when it had to suspend the idea of building more stores and had to pull out of the Moscow area before it ever really got started there. That was done because other stores in Samara and Ufa were not being allowed to open without bribery, and IKEA was not willing to accept that. Taking or giving bribes had never been part of the strategic management plan for IKEA, and that was not going to change simply because the company was moving into a country where that kind of behavior was common. Staying true to the values and plans that have been agreed upon is very important for companies that want to be taken seriously (Abrahamson & Eisenman, 1999).
For a company that only operates in one location or one country, the strategic management plan would be very direct and to the point. However, more and more businesses are going global today. As they do that, they find that what works well as a strategy in one place does not work nearly as well in another location. Instead, they need to create a strategic plan for each country, and sometimes different plans for different regions of that country. As they do that, they are better able to determine what each country needs and what will work the best to bring a steady stream of customers to their store (Frandsen & Johansen, 2009). While there is more to the issue than just profit, if a company is not making money it will not be successful in continuing to grow and expand. Some companies have even closed up completely or taken their operations out of certain countries because their strategic plan was not strong enough to help them succeed there. That can often be avoided with careful planning, but sometimes even the very best plans are unsuccessful (Frandsen & Johansen, 2009).
For IKEA the strategic management of the company involved plans that allowed it to work with the Russian system while still retaining the values it believed in as a corporation. That was a very important part of why it was successful, even though it seemed for a while that it would not be able to move forward with its plans for expansion. The Russian government fought against IKEA to a certain extent — not because it did not want the company in its country, but because IKEA refused to get involved in the culture of corruption that was (and still is) so prevalent in Russia. In the end, however, IKEA’s strategic plan worked and it was able to continue to expand in Russia without buying into the bribery culture. That allowed IKEA to continue to operate within the moral framework it had created for itself, but still move into countries where that same framework was not recognized. Good strategic management can allow a company to operate almost anywhere (Cornelissen, 2011).
IKEA’s strategy will have to change somewhat if it wants to continue to expand in Russia, though, because it is such a large country. There are regions that are different from one another, and IKEA will have to recognize those differences and make sure they are understood in order to be successful. What works in St. Petersburg may not work in Moscow, and what works in Ufa may not be as popular in Samara. Companies that have stores in a lot of different locations can use the same basic strategic plan for all of them, but with subtle (and sometimes not so subtle) adjustments that help the stores fit in with their locations (Abrahamson & Eisenman, 1999). Fitting in can be difficult, especially if a company is moving into a location that it has never been in before, and into a culture that is very different from its own. A good strategic plan will take all of that into account, and management will have already done a great deal of research before the move is made (Christensen & Cornelissen, 2011). That way, there is a lower chance of failure.
It would be unfortunate for a company, whether small or large, to fail in a new location, but it can and does happen. While larger corporations are more easily able to absorb the loss, there are still issues that have to be addressed in order to determine why the loss occurred. With a good strategic plan, most losses can be avoided. Those that are inevitable can be studied, so that it can be determined why the loss took place and how it can be avoided in the future (Frandsen & Johansen, 2009). Plans can also be adjusted and changed if the company is not doing as well as expected, and strategies have to be able to be changed as the market changes (Abrahamson & Eisenman, 1999). Remaining too rigid can spell the death of a company, because change is inevitable. While change may not be enjoyed, it has to be focused on and understood to help ensure success.
Managerial Perceptions of Political Risk
One of the biggest risks that managers can face when they move into a new area with a company is political (Botan & Hazleton, 2006). This was faced by IKEA in Russia, as the corruption in politics almost spelled the end of the company’s expansion there. In the end it turned out for the best and IKEA was allowed to expand, but there were some very tense moments and months where no one really knew what was going to happen next. That can occur with many different companies, especially if they find that they are moving into an area where their politics are very different from the host government (Cornelissen, 2006). In cases like IKEA, Russia is completely different from Sweden in the way it handles politics. While IKEA certainly knew this before it attempted to move into the Russian market, it is also likely that the company was not completely prepared for the depth of the differences. Things are often different through research than they are through participation, and this was one of the experiences that IKEA had.
Politics plays a big role in nearly everything that is done in a country, even if it does not seem like it at the time (Cornelissen & Kafouras, 2008). Retail sales may seem like nothing significant, especially in political circles, but there is much to consider when a company wants to move into a new area. Planning and zoning are affected, and the people who live close to where the new store will be built will be affected in some way. Whether they are happy about the store coming in could affect how they vote, and the people in political power need to be aware of that so they can make decisions that will affect their career (Frandsen & Johansen, 2009). One could argue that everything should be done in the best interest of the people, and that a politician’s career should have nothing to do with it. While that may be true, it is not the way things actually work.
For companies like IKEA, one of the ways to get into the market is to show the people who are in charge from a political sense that the company’s moving into the area would benefit them. If they believe this to be the case, the company will likely be allowed in, and if they are not able to convince the people in power, then it will be likely that the company will have to locate itself elsewhere (Czarniawska & Sevon, 1996). Politics matters a great deal when it comes to a new company coming into an area, and that is especially true if it is a company that is based in another country and wants to move into the market in a country where it does not yet have any stores or presence. Once a company is established in a country, building more stores may be easier, because those who are in political power will be able to judge whether the company is popular and whether it is providing revenue and value to the country (Daymon & Holloway, 2002). The more value the company is providing, the more likely that it will be allowed to continue to expand in a particular country. Otherwise, it may be very limited in what it can do, and may even go out of business.
It is not just those who have political power who are thinking about this issue. The managers of companies that want to move into new markets also have to consider politics (Abrahamson & Eisenman, 1999). By “playing ball” with political leaders, companies can often get approved to do things that they would otherwise not be allowed to do. IKEA could have done that with Russia, by paying bribes to the officials and to the power company. However, it decided not to do that, and knew that it would be risking its status in the country and its ability to expand because it would not “play politics” like most companies in Russia. It was a calculated risk, and one that the management of IKEA was clearly prepared to take in order to make sure that the integrity and moral values the company held remained intact, even if those in political power felt slighted.
When management calculates political risk, the managers have to look at whether playing politics is something they are willing to do, and if it is something that goes against the morals and beliefs of the company (Frandsen & Johansen, 2009). Most companies play politics to some degree, because they know that more will get done that way and that they will be able to move forward more quickly and easily with the plans they have. However, these companies also have a limit as to what they will accept when they play politics, and IKEA had a clear line that it would not cross. It was prepared to suspend its plans to build more stores, and was even prepared to pull completely out of the Russian market if necessary, but it was not going to compromise values in which it strongly believed just so it could remain in a market. Not all companies would have done that, but each company has to follow the ethical code it believes to be right for the business it operates (Cornelissen, 2011). Companies that will not play politics beyond a certain point are often respected, even if it is a grudging respect.
When managers decide that they are or are not going to take a certain level of political risk, they have to take everything about the situation into account (Frandsen & Johansen, 2009). If they fail to consider everything properly, they can end up making a serious miscalculation that can cause them to lose out on a lot of what they could have had in a particular country. Companies should stand their ground if it is something they deeply believe in, but they should also be prepared to compromise on the things that might not matter as much to them (Daymon & Holloway, 2002). It is likely that IKEA did make some compromises that allowed it to get into the Russian market, but it drew the line at offering bribes. That was the political risk that it was willing to take, based on the beliefs held by management. While it could have ended badly, IKEA was willing to accept that risk.
Communication During a Crisis
Being able to communicate during a crisis is something that all businesses need to know. It can be difficult to do so, because during a crisis is when most communication channels break down. Also worthy of consideration is that the reason for the crisis could be a breakdown in communication. Even a misunderstanding that is not cleared up and allowed to fester and get worse can cause serious problems for a company that is trying to communicate with a host country’s government or officials on any level (Cornelissen, 2011). That does not mean, however, that communication should be ignored or given up on just because a crisis situation has been reached. Instead, it is very important that any company understand that the way in which the country in which it is located communicates during a crisis may be very different than what the home country would do. By being aware of that and remembering to focus on it, it is possible that the company can get through any issues and problems that would otherwise be hard to get past.
Overall, communication during a crisis is not going to be easy. There are different types of crisis situations, and the communication protocol could be very different for each one. It is also important to remember that what the company sees as a crisis may not be viewed that way by the company (Cornelissen, 2011). Until and unless the company is sure that the issue is being viewed as a crisis by the country, it should not assume that the country will treat it as such. In the case of IKEA, the crisis was that the government would not allow the company to move forward with planned stores in Ufa and Samara. Because of that, IKEA suspended any possibility of moving into Moscow. That put the company and the country at an impasse, and caused a breakdown in communication because neither side wanted to be the first one to concede anything to the other side.
Whether it was actually a “crisis” is debatable, but it could be called such in the scope of doing business and how the problem was going to affect not only IKEA’s bottom line but also the desires and needs of the Russian people. Eventually, things were smoothed over on the country’s side, and IKEA was able to move ahead with its plans. However, the crisis did not end because the two sides started talking to one another and trying to work it out and reach a compromise. That was unfortunate, as trying to talk it out is really the best way to attempt to handle any kind of crisis that appears in a business context (Frandsen & Johansen, 2009). While the important thing was that the situation was resolved, communication in a crisis is very important and something that both IKEA and the Russian government were lacking.
It is easy to see that there are no simple answers where IKEA and Russia are concerned, and that cases like IKEA’s are not particularly common. However, they can and do happen, often because of communication breakdowns and related problems that come from companies moving into countries where the culture is very different from theirs or not well understood. That is not to say that companies should not make these kinds of moves. Expanding into new markets is important. However, the more a company understands a country and its culture before attempting to make it a new market, the better off that company will be. That way, the company will also be better prepared for anything that could come its way in politics or business. IKEA likely thought it was prepared for Russia, but there were so many political and cultural differences that it still struggled. In the end it managed to prevail, but it was a hard fought battle and IKEA did lose some money before all was said and done. The profit it is making on its Russian stores is enough to make it worth moving into the market, but there were certainly lessons learned and it could have handled some things differently.
The communication that IKEA had with the Russian officials was one of the most significant points to take from the case. There were many communication breakdowns throughout the entire history of what IKEA was trying to do in Russia. The lack of interest that IKEA had in bribing officials was important to note, as well. If it would have done so, things would have moved much more smoothly for the company. However, there is something to be said for a company that focuses on its morals and beliefs, and that does not let those things go just because it moves into a market where they are not looked upon with favor. IKEA could have just done things the Russian way because it was in Russia, but it had its limits based on what it would accept and it held strongly to those.
Corporate diplomacy was very important for IKEA, but was something it did not always hold strongly to. Getting generators to power its store because it would not pay a bribe to the electric company made sense and was a powerful move to make, but it could not really be called diplomatic. When corporations are diplomatic, they handle things with grace, not muscle. While many applauded what IKEA did, it could also have set the company back when it came to how it was viewed by Russian officials. That is not to say that IKEA should have paid the bribe, but only that there may have been more diplomatic ways of addressing the situation and working something out. Companies that focus on diplomacy are often able to handle issues that other companies may do poorly with, and that diplomacy can carry a company a very long way when it comes to moving into new markets and dealing with host governments.
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